Howard Marks: Investors Should ‘Calibrate’ Their Portfolios To Include The Current Market Cycle

We’ve just been listening to a great podcast with Meb Faber interviewing Howard Marks. Marks is discussing his new book – Mastering The Market Cycle, and he provides a great illustration of how investors can practically ‘calibrate’ their portfolios to include the current market cycle.

Howard: You mentioned a memo that I put out in July of 2017 about what was going on in the market in my opinion. It attracted a lot of attention. One TV investment analyst said, “Howard Marks says it’s time to get out.” And, you know, my reaction is there are two things I would never say. One is, “Get out,” and the other is, “It’s time.”

I’m never that sure and I don’t think that anybody can be that sure that you should be out as opposed to in and that today is the time to do it. If your listeners don’t feel that degree of conviction and certitude, I think that’s the right thing not the wrong thing, thus I say ‘calibrate’.

It’s not a matter of in or out, or today or tomorrow, all of which have so much precision and definiteness to them, but rather think of it as a speedometer from 0 to 100.

And 0 is maximum defense, all cash and 100 is maximum offense, fully invested in aggressive and risky assets. My reference to calibrating is really saying, “Where should we be in between those extremes of 0 to 100?”

Nobody should run his portfolio that today I’m 0 and two weeks I’m a 100 and then I go back to 0. We should adjust moderately within the range.

First of all, I would encourage each of your readers to think about where, from 0 to a 100, they should normally be. Think about your age, think about your earnings, think about your future, think about how much assets you have, think about your circumstances, how much assets you might need in a pinch, think about your psychological makeup and your ability to live with risk.

You might say, “You know what, I’m a young person. I have a bright future. I have a good income. I’m making more money than I need every day. I’m putting some aside into the market. I’ve been through this before. I can stand to live with fluctuations. I think I’m a 75 or an 80. My normal risk posture is 75 or 80.” So I think it’s important to do that.

Of course, it’s really important to do it accurately. And one of the problems is that people, in good times, people overestimate their ability to live with pain. And I remember the people who back in ’97 when the tech stocks were booming, people saying, “Oh, you know what? I wouldn’t mind if I lost 30% of my 401k portfolio not so much, it’d be fine.” Believe me when they went down 40% they weren’t fine.

So I would encourage everybody who’s listening to try to think about what their normal risk posture should be and need to do it in the form of my speedometer from 0 to a 100. So we have a person who says, “I’m normally a 75.”

Now the next question is, “Okay, then where should you be today?” Today are we in the depressed part of the cycle and are things undervalued relative to history and are people moping around and willing to take risk in which environment I would say you should amp up your risk because you’ll be getting a lot of bargains?

Or are we in the elevated part of the cycle where everybody’s happy, nobody sees anything to worry about, everybody thinks risk is their friend, that the more risk they take, the more money they’ll make. And so securities are priced above their historic levels and the mood is very positive, which means that there’s probably a lot of optimism priced into every security.

If you think you’re in the elevated portion of the cycle, then I think you wanna turn the speedometer down and maybe you wanna only be a 50 or a 60 at that time. You don’t have to have the certainty to go from your normal 75 to 0 in order to do a good job of managing our assets and adjustment within the range, I think, is all that most people can do.